‘Awful’ Italy debt sale heightens euro zone stress

Published: 25 November 2011 10:36 PM

A union workers flag CGIL is seen in front of a bank during a protest downtown Milan, November 25, 2011. — Reuters pic MILAN, Nov 25 — Italy paid a record 6.5 per cent to borrow money over six months today and its longer-term funding costs soared far above levels seen as sustainable for public finances, raising the pressure on Rome’s new emergency government.

The auction yield on the six-month paper almost doubled compared to a month earlier, capping a week in which a German bond auction came close to failing and the leaders of Germany, France and Italy failed to make progress on crisis resolution measures.

Though Italy managed to raise the full planned amount of €10 billion (RM42.4 billion), weakening demand and the highest borrowing costs since it joined the euro frightened investors, pushing Italian stocks lower and bond yields to record highs on the secondary market.

Yields on two-year BTP bonds soared to more than 8 per cent in response, a euro lifetime high, despite reported purchases by the European Central Bank.

In a sign of intense market stress, it now costs more to borrow for two years than 10 on the secondary market and borrowing costs for whatever term are above the 7 per cent threshold, over which Italy is likely to need outside help if they do not subside.

“The pricing is awful,” said Padhraic Garvey, rate strategist with Dutch bank ING in Amsterdam. “The object of the exercise this morning was to get the job done and they’ve done that, but that’s about the only positive thing to say.”

Investors’ attention will now turn to a bond sale of up to €8 billion that Italy is planning for next Tuesday.

“For the BTP auctions next week, we’ll have more of the same they’ll probably get it done at a concession,” Garvey said.

Italy’s new technocrat government, which took power last week, is at work on structural reforms to revive the stagnant economy but markets are looking for quick and effective responses from European policymakers, such as a greater involvement of the European Central Bank.

Traders said the ECB was buying Italian and Spanish bonds in an attempt to shore the market up. But given its reluctance to prop up high-debt euro zone governments, its bond-buying program has been conducted intermittently, and never powerfully enough to provide more than short-term stability.

New Bank of Italy Governor Ignazio Visco said short-term measures to tame Italy’s budget deficit would not be enough to solve the country’s economic problems and only structural reforms will generate growth.

At an annual average rate of just 0.3 per cent over the past decade, the Italian economy has grown faster than only a handful of other countries across the world. Real purchasing power has fallen 4 per cent in 10 years.

BIG SPRING DEBT BILLS

Since being thrust to the fore of the euro zone crisis in July, Italy has always managed to attract sufficient demand at its auctions.

But record high yields threaten Rome’s planned gross issuance of €440 billion for 2012 as interest payments on the country’s €1.9 trillion debt pile rise.

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